Partnerships and unincorporated joint ventures share many similarities. Consequently, these two terms are often used interchangeably in a commercial setting to describe any shared enterprise that does not have a separate legal personality, usually without any due consideration for the specific nature of the business structure referred to. In many instances, the conflation of these two terms leads to the establishment of entities that are ill-suited to the economic objectives that their founders seek to achieve, as well as the misapplication of many pre-existing structures.
In this series of articles, the juridical meanings of the terms “partnership” and “unincorporated joint venture”, as well as the distinct advantages and disadvantages that each of these business structures offer, are examined. This article, part one of the series, is focuses on partnerships.
A “partnership” may be defined as a legal relationship between two or more persons (“partners”), but no more than twenty, who come together to conduct a business, trade or profession without creating a separate legal entity. This relationship is governed by a contract, known as a “partnership agreement”, in terms of which the partners agree to make some contribution, whether money, labour or expertise, to the partnership business, in exchange for a commensurate share in the profits or losses thereof.
There are several different types of partnerships, which could be categorised in two distinct ways. Firstly, universal partnerships are distinguishable from particular partnerships. In a universal partnership, the partners agree to contribute all their resources to the partnership business, for an indefinite period and wide-ranging purposes, in exchange for a commensurate share of all that is earned by them during the partnership.
In a particular partnership, however, the partners agree to contribute only part of their resources to the partnership business, for a temporary period and a particular purpose, in exchange for commensurate of the profits of that specific project only.
Secondly, ordinary partnerships are distinguishable from extraordinary partnerships. In an ordinary partnership, the partners share commensurately in the profits and losses of the partnership business, for which they are jointly and severally liable.
In an extraordinary partnership, however, certain partners’ liabilities to third-parties are limited in some way. Two types of extraordinary partnership can be distinguished, namely an anonymous partnership and a partnership en commandite.
In an anonymous partnership, the names of one or more of the partners (“anonymous partners”) are withheld from the public. In exchange, the anonymous partners will not be liable to third-parties for the debts of the partnership business for as long as their names remain withheld from the public. They will, however, be liable to the other partners for a pro rata share of these debts.
In a partnership en commandite, like an anonymous partnership, the names of one or more of the partners (“the en commandite partners”) are not disclosed to the public. Unlike in an anonymous partnership, however, the liabilities of the en commandite partners are restricted to the fixed financial contribution that they agree to make to the partnership business.
Partnerships offer several advantages over other business structures. Firstly, the partners are entitled to a commensurate share of the profits if the partnership business is successful.
Secondly, because there are no legal formalities per se to establish a partnership, they are relatively quick and inexpensive to set-up.
Thirdly, partnerships are easy to operate and relatively flexible in terms of their management, as they are less strictly regulated than other business structures.
Lastly, these business structures allow the partners to combine their skills and resources, which could be an advantage if they are able to work well together.
Partnerships, however, also offer several disadvantages. Firstly, because a partnership does not have a legal personality separate from its members, the partners have unlimited liability for the debts of the partnership business, subject to the terms of the partnership agreement. This could be particularly problematic if one of the partners fails to exercise sound judgement, because, if the partnership’s estate is sequestrated, the estates of the individual partners could also be sequestrated unless they partners undertake to settle the debt themselves.
Secondly, this business structure severely limits the partners’ freedom to act, as all of the partners must agree with a decision before it may be implemented.
Thirdly, there are no statutory measures regulating the governance of partnerships. This could be particularly problematic if a dispute arises between the partners and they have not concluded a written partnership agreement.
Fourthly, the way in which profits are shared could also be a disadvantage, particularly if one or more of the partners fail to contribute to the partnership business.
Lastly, partnerships enjoy a lesser degree of business continuity, as they technically dissolve upon a change in membership.
The information in this article serves as a general guide only and does not constitute legal advice. Readers who wish to learn more about this topic are encouraged to contact a qualified legal practitioner.